Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-9861

 

 

M&T BANK CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

New York   16-0968385

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One M & T Plaza

Buffalo, New York

  14203
(Address of principal executive offices)   (Zip Code)

(716) 842-5445

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

Number of shares of the registrant’s Common Stock, $0.50 par value, outstanding as of the close of business on April 30, 2013: 129,008,896 shares.

 

 

 


Table of Contents

M&T BANK CORPORATION

FORM 10-Q

For the Quarterly Period Ended March 31, 2013

 

Table of Contents of Information Required in Report

   Page  
Part I. FINANCIAL INFORMATION   

Item 1.

  Financial Statements.   
  CONSOLIDATED BALANCE SHEET—March 31, 2013 and December 31, 2012      3   
  CONSOLIDATED STATEMENT OF INCOME—Three months ended March 31, 2013 and 2012      4   
  CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME—Three months ended March 31, 2013 and 2012      5   
  CONSOLIDATED STATEMENT OF CASH FLOWS—Three months ended March 31, 2013 and 2012      6   
  CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY—Three months ended March 31, 2013 and 2012      7   
  NOTES TO FINANCIAL STATEMENTS      8   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations.      51   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk.      92   

Item 4.

  Controls and Procedures.      92   
Part II. OTHER INFORMATION   

Item 1.

  Legal Proceedings.      92   

Item 1A.

  Risk Factors.      92   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds.      93   

Item 3.

  Defaults Upon Senior Securities.      93   

Item 4.

  Mine Safety Disclosures.      93   

Item 5.

  Other Information.      93   

Item 6.

  Exhibits.      94   
SIGNATURES        95   
EXHIBIT INDEX      95   

 

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Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (Unaudited)

 

Dollars in thousands, except per share

   March 31,
2013
    December 31,
2012
 
Assets  

Cash and due from banks

   $ 1,231,091        1,983,615   
 

Interest-bearing deposits at banks

     1,304,770        129,945   
 

Federal funds sold

     594,976        3,000   
 

Trading account

     420,144        488,966   
 

Investment securities (includes pledged securities that can be sold or repledged of $1,761,978 at March 31, 2013; $1,801,842 at December 31, 2012)

    
 

Available for sale (cost: $4,288,994 at March 31, 2013; $4,643,070 at December 31, 2012)

     4,400,742        4,739,437   
 

Held to maturity (fair value: $910,783 at March 31, 2013; $976,883 at December 31, 2012)

     959,199        1,032,276   
 

Other (fair value: $300,890 at March 31, 2013; $302,648 at December 31, 2012)

     300,890        302,648   
    

 

 

   

 

 

 
 

Total investment securities

     5,660,831        6,074,361   
    

 

 

   

 

 

 
 

Loans and leases

     66,139,206        66,790,186   
 

Unearned discount

     (214,939     (219,229
    

 

 

   

 

 

 
 

Loans and leases, net of unearned discount

     65,924,267        66,570,957   
 

Allowance for credit losses

     (927,117     (925,860
    

 

 

   

 

 

 
 

Loans and leases, net

     64,997,150        65,645,097   
    

 

 

   

 

 

 
 

Premises and equipment

     589,570        594,652   
 

Goodwill

     3,524,625        3,524,625   
 

Core deposit and other intangible assets

     102,420        115,763   
 

Accrued interest and other assets

     4,386,380        4,448,779   
    

 

 

   

 

 

 
 

Total assets

   $ 82,811,957        83,008,803   
    

 

 

   

 

 

 
Liabilities  

Noninterest-bearing deposits

   $ 23,603,971        24,240,802   
 

NOW accounts

     1,891,621        1,979,619   
 

Savings deposits

     35,024,025        33,783,947   
 

Time deposits

     4,304,033        4,562,366   
 

Deposits at Cayman Islands office

     266,076        1,044,519   
    

 

 

   

 

 

 
 

Total deposits

     65,089,726        65,611,253   
    

 

 

   

 

 

 
 

Federal funds purchased and agreements to repurchase securities

     374,593        1,074,482   
 

Accrued interest and other liabilities

     1,530,118        1,512,717   
 

Long-term borrowings

     5,394,563        4,607,758   
    

 

 

   

 

 

 
 

Total liabilities

     72,389,000        72,806,210   
    

 

 

   

 

 

 
Shareholders’
equity
 

Preferred stock, $1.00 par, 1,000,000 shares authorized; Issued and outstanding: Liquidation preference of $1,000 per share: 381,500 shares at March 31, 2013 and December 31, 2012; Liquidation preference of $10,000 per share: 50,000 shares at March 31, 2013 and December 31, 2012

     874,627        872,500   
 

Common stock, $.50 par, 250,000,000 shares authorized, 128,952,578 shares issued at March 31, 2013; 128,176,912 shares issued at December 31, 2012

     64,476        64,088   
 

Common stock issuable, 46,552 shares at March 31, 2013; 57,409 shares at December 31, 2012

     2,829        3,473   
 

Additional paid-in capital

     3,061,783        3,025,520   
 

Retained earnings

     6,645,195        6,477,276   
 

Accumulated other comprehensive income (loss), net

     (225,953     (240,264
    

 

 

   

 

 

 
 

Total shareholders’ equity

     10,422,957        10,202,593   
    

 

 

   

 

 

 
 

Total liabilities and shareholders’ equity

   $ 82,811,957        83,008,803   
    

 

 

   

 

 

 

 

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

 

         Three months ended March 31  

In thousands, except per share

   2013     2012  

Interest income

 

Loans and leases, including fees

   $ 682,455        648,514   
 

Deposits at banks

     267        213   
 

Federal funds sold

     17        3   
 

Agreements to resell securities

     9        —     
 

Trading account

     638        317   
 

Investment securities

    
 

Fully taxable

     44,760        62,964   
 

Exempt from federal taxes

     1,829        2,084   
    

 

 

   

 

 

 
 

Total interest income

     729,975        714,095   
    

 

 

   

 

 

 

Interest expense

 

NOW accounts

     322        283   
 

Savings deposits

     14,037        18,183   
 

Time deposits

     8,196        13,509   
 

Deposits at Cayman Islands office

     388        213   
 

Short-term borrowings

     231        303   
 

Long-term borrowings

     50,751        61,215   
    

 

 

   

 

 

 
 

Total interest expense

     73,925        93,706   
    

 

 

   

 

 

 
 

Net interest income

     656,050        620,389   
 

Provision for credit losses

     38,000        49,000   
    

 

 

   

 

 

 
 

Net interest income after provision for credit losses

     618,050        571,389   
    

 

 

   

 

 

 

Other income

 

Mortgage banking revenues

     93,103        56,192   
 

Service charges on deposit accounts

     110,949        108,889   
 

Trust income

     121,603        116,953   
 

Brokerage services income

     15,711        13,901   
 

Trading account and foreign exchange gains

     8,927        10,571   
 

Gain on bank investment securities

     —          45   
 

Total other-than-temporary impairment (“OTTI”) losses

     (1,884     (20,040
 

Portion of OTTI losses recognized in other comprehensive income (before taxes)

     (7,916     8,554   
    

 

 

   

 

 

 
 

Net OTTI losses recognized in earnings

     (9,800     (11,486
    

 

 

   

 

 

 
 

Equity in earnings of Bayview Lending Group LLC

     (3,656     (4,752
 

Other revenues from operations

     96,045        86,410   
    

 

 

   

 

 

 
 

Total other income

     432,882        376,723   
    

 

 

   

 

 

 

Other expense

 

Salaries and employee benefits

     356,551        346,098   
 

Equipment and net occupancy

     65,159        65,043   
 

Printing, postage and supplies

     10,699        11,872   
 

Amortization of core deposit and other intangible assets

     13,343        16,774   
 

FDIC assessments

     19,438        28,949   
 

Other costs of operations

     170,406        170,959   
    

 

 

   

 

 

 
 

Total other expense

     635,596        639,695   
    

 

 

   

 

 

 
 

Income before taxes

     415,336        308,417   
 

Income taxes

     141,223        101,954   
    

 

 

   

 

 

 
 

Net income

   $ 274,113        206,463   
    

 

 

   

 

 

 
 

Net income available to common shareholders

    
 

Basic

   $ 255,079        188,236   
 

Diluted

     255,096        188,241   
 

Net income per common share

    
 

Basic

   $ 2.00        1.50   
 

Diluted

     1.98        1.50   
 

Cash dividends per common share

   $ .70        .70   
 

Average common shares outstanding

    
 

Basic

     127,669        125,220   
 

Diluted

     128,636        125,616   

 

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

 

     Three months ended March 31  

In thousands

   2013     2012  

Net income

   $ 274,113        206,463   

Other comprehensive income, net of tax and reclassification adjustments:

    

Net unrealized gains on investment securities

     10,079        20,082   

Reclassification to income for amortization of gains on terminated cash flow hedges

     —           (70

Foreign currency translation adjustment

     (932     402   

Defined benefit plans liability adjustment

     5,164        4,769   
  

 

 

   

 

 

 

Total other comprehensive income

     14,311        25,183   
  

 

 

   

 

 

 

Total comprehensive income

   $ 288,424        231,646   
  

 

 

   

 

 

 

 

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

 

         Three months ended March 31  

In thousands

        2013     2012  
Cash flows from operating activities  

Net income

   $ 274,113        206,463   
 

Adjustments to reconcile net income to net cash provided by operating activities

    
 

Provision for credit losses

     38,000        49,000   
 

Depreciation and amortization of premises and equipment

     22,027        21,022   
 

Amortization of capitalized servicing rights

     15,208        14,476   
 

Amortization of core deposit and other intangible assets

     13,343        16,774   
 

Provision for deferred income taxes

     19,253        15,225   
 

Asset write-downs

     13,558        16,388   
 

Net gain on sales of assets

     (2,676     (2,471
 

Net change in accrued interest receivable, payable

     (2,872     7,725   
 

Net change in other accrued income and expense

     80,645        32,134   
 

Net change in loans originated for sale

     205,643        154,436   
 

Net change in trading account assets and liabilities

     22,156        7,840   
    

 

 

   

 

 

 
 

Net cash provided by operating activities

     698,398        539,012   
    

 

 

   

 

 

 
Cash flows from investing activities  

Proceeds from sales of investment securities

    
 

Available for sale

     —          1,045   
 

Other

     2,032        10,224   
 

Proceeds from maturities of investment securities

    
 

Available for sale

     353,305        417,348   
 

Held to maturity

     79,164        82,670   
 

Purchases of investment securities

    
 

Available for sale

     (14,597     (10,286
 

Held to maturity

     (6,010     (6,287
 

Other

     (274     (318
 

Net (increase) decrease in loans and leases

     404,142        (1,042,144
 

Net increase in interest-bearing deposits at banks

     (1,174,825     (1,127,080
 

Other investments, net

     698        2,416   
 

Capital expenditures, net

     (16,671     (19,377
 

Proceeds from sales of real estate acquired in settlement of loans

     15,500        33,775   
 

Other, net

     (14,237     (25,840
    

 

 

   

 

 

 
 

Net cash used by investing activities

     (371,773     (1,683,854
    

 

 

   

 

 

 
Cash flows from financing activities  

Net increase (decrease) in deposits

     (519,555     1,522,583   
 

Net decrease in short-term borrowings

     (699,889     (270,081
 

Proceeds from long-term borrowings

     799,760        —     
 

Payments on long-term borrowings

     (3,460     (202,352
 

Dividends paid—common

     (90,788     (89,041
 

Dividends paid—preferred

     (4,769     (4,769
 

Other, net

     31,528        80,197   
    

 

 

   

 

 

 
 

Net cash provided (used) by financing activities

     (487,173     1,036,537   
    

 

 

   

 

 

 
 

Net decrease in cash and cash equivalents

     (160,548     (108,305
 

Cash and cash equivalents at beginning of period

     1,986,615        1,452,397   
    

 

 

   

 

 

 
 

Cash and cash equivalents at end of period

   $ 1,826,067        1,344,092   
    

 

 

   

 

 

 
Supplemental disclosure of cash flow information  

Interest received during the period

   $ 718,296        721,159   
 

Interest paid during the period

     72,106        89,241   
 

Income taxes paid during the period

     9,545        8,416   
    

 

 

   

 

 

 
Supplemental schedule of noncash investing and financing activities  

Real estate acquired in settlement of loans

   $ 8,244        17,123   

 

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

 

In thousands, except per share

   Preferred
stock
     Common
stock
     Common
stock
issuable
    Additional
paid-in
capital
    Retained
earnings
    Accumulated
other
comprehensive
income (loss),
net
    Total  

2012

                

Balance—January 1, 2012

   $  864,585         62,842         4,072        2,828,986        5,867,165        (356,441     9,271,209   

Total comprehensive income

     —           —           —          —          206,463        25,183        231,646   

Preferred stock cash dividends

     —           —           —          —          (13,363     —          (13,363

Amortization of preferred stock discount

     1,904         —           —          —          (1,904     —          —     

Stock-based compensation plans:

                

Compensation expense, net

     —           207         —          7,783        —          —          7,990   

Exercises of stock options, net

     —           183         —          19,429        —          —          19,612   

Directors’ stock plan

     —           2         —          370        —          —          372   

Deferred compensation plans, net, including dividend equivalents

     —           4         (645     507        (40     —          (174

Other

     —           —           —          481        —          —          481   

Common stock cash dividends—$.70 per share

     —           —           —          —          (89,085     —          (89,085
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance—March 31, 2012

   $ 866,489         63,238         3,427        2,857,556        5,969,236        (331,258     9,428,688   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2013

                

Balance—January 1, 2013

   $ 872,500         64,088         3,473        3,025,520        6,477,276        (240,264     10,202,593   

Total comprehensive income

     —           —           —          —          274,113        14,311        288,424   

Preferred stock cash dividends

     —           —           —          —          (13,363     —          (13,363

Amortization of preferred stock discount

     2,127         —           —          —          (2,127     —          —     

Exercise of 407,542 Series C stock warrants into 186,589 shares of common stock

     —           93         —          (93     —          —          —     

Stock-based compensation plans:

                

Compensation expense, net

     —           160         —          12,911        —          —          13,071   

Exercises of stock options, net

     —           126         —          21,444        —          —          21,570   

Directors’ stock plan

     —           4         —          772        —          —          776   

Deferred compensation plans, net, including dividend equivalents

     —           5         (644     563        (32     —          (108

Other

     —           —           —          666        —          —          666   

Common stock cash dividends—$.70 per share

     —           —           —          —          (90,672     —          (90,672
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance—March 31, 2013

   $ 874,627         64,476         2,829        3,061,783        6,645,195        (225,953     10,422,957   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS

1. Significant accounting policies

The consolidated financial statements of M&T Bank Corporation (“M&T”) and subsidiaries (“the Company”) were compiled in accordance with generally accepted accounting principles (“GAAP”) using the accounting policies set forth in note 1 of Notes to Financial Statements included in the 2012 Annual Report. In the opinion of management, all adjustments necessary for a fair presentation have been made and were all of a normal recurring nature.

2. Acquisitions

On August 27, 2012, M&T announced that it had entered into a definitive agreement with Hudson City Bancorp, Inc. (“Hudson City”), headquartered in Paramus, New Jersey, under which Hudson City would be acquired by M&T. Pursuant to the terms of the agreement, Hudson City shareholders will receive consideration for each common share of Hudson City in an amount valued at .08403 of an M&T share in the form of either M&T common stock or cash, based on the election of each Hudson City shareholder, subject to proration as specified in the merger agreement (which provides for an aggregate split of total consideration of 60% common stock of M&T and 40% cash). As of March 31, 2013 total consideration to be paid was valued at approximately $4.4 billion.

At March 31, 2013, Hudson City had $40.3 billion of assets, including $26.2 billion of loans and $10.6 billion of investment securities, and $35.6 billion of liabilities, including $23.2 billion of deposits. After the merger is completed, M&T forecasts that it will likely repay approximately $12 billion of Hudson City’s long-term borrowings and sell investment securities. The merger has received the approval of the common shareholders of M&T and Hudson City. However, the merger is subject to a number of other conditions, including regulatory approvals. On April 12, 2013, M&T announced that additional time would be required to obtain a regulatory determination on the applications for the proposed merger with Hudson City. M&T has learned that the Federal Reserve has identified certain regulatory concerns with the Company’s procedures, systems and processes related to the Company’s Bank Secrecy Act and anti-money-laundering compliance program. M&T has commenced a major initiative, including the hiring of an outside consulting firm, intended to fully address the Federal Reserve’s concerns. In view of the potential timeframe required to implement this initiative, demonstrate its efficacy to the satisfaction of the Federal Reserve and otherwise meet any other regulatory requirements that may be imposed in connection with these matters, M&T and Hudson City extended the date after which either party may elect to terminate the merger agreement if the merger has not yet been completed from August 27, 2013 to January 31, 2014. There can be no assurances that the merger will be completed by that date. M&T and Hudson City intend to close the merger as soon as possible following the receipt of all necessary regulatory approvals and satisfaction of all other conditions to closing.

In connection with the pending acquisition, the Company incurred merger-related expenses related to systems conversions and other costs of integrating and conforming acquired operations with and into the Company. Those expenses consisted largely of professional services and other temporary help fees associated with planning for the conversion of systems and/or integration of operations; initial marketing and promotion expenses designed to introduce M&T Bank to its new customers; travel costs; and printing, postage, supplies and other costs of planning for the transaction and commencing operations in new markets and offices. The Company expects to incur additional merger-related expenses during the remainder of 2013.

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

2. Acquisitions, continued

 

A summary of merger-related expenses in the first quarter of 2013 associated with the pending Hudson City acquisition and in the first quarter of 2012 associated with the May 16, 2011 acquisition of Wilmington Trust Corporation (“Wilmington Trust”) included in the consolidated statement of income follows:

 

     Three months ended  
     March 31, 2013      March 31, 2012  
     (in thousands)  

Salaries and employee benefits

   $ 536       $ 1,973   

Equipment and net occupancy

     201         15   

Printing, postage and supplies

     827         —     

Other cost of operations

     3,168         740   
  

 

 

    

 

 

 
   $ 4,732       $ 2,728   
  

 

 

    

 

 

 

3. Investment securities

The amortized cost and estimated fair value of investment securities were as follows:

 

     Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
     Estimated
fair value
 
     (in thousands)  

March 31, 2013

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 38,907         793         —         $ 39,700   

Obligations of states and political subdivisions

     19,545         503         7         20,041   

Mortgage-backed securities:

           

Government issued or guaranteed

     2,855,716         174,372         178         3,029,910   

Privately issued residential

     1,077,879         5,799         97,989         985,689   

Privately issued commercial

     6,414         1,144         —           7,558   

Collateralized debt obligations

     42,957         19,799         1,038         61,718   

Other debt securities

     136,645         2,371         21,505         117,511   

Equity securities

     110,931         27,691         7         138,615   
  

 

 

    

 

 

    

 

 

    

 

 

 
     4,288,994         232,472         120,724         4,400,742   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

           

Obligations of states and political subdivisions

     180,458         7,003         31         187,430   

Mortgage-backed securities:

           

Government issued or guaranteed

     532,074         26,003         —           558,077   

Privately issued

     236,632         47         81,438         155,241   

Other debt securities

     10,035         —           —           10,035   
  

 

 

    

 

 

    

 

 

    

 

 

 
     959,199         33,053         81,469         910,783   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other securities

     300,890         —           —           300,890   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,549,083         265,525         202,193       $ 5,612,415   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

- 9 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

     Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
     Estimated
fair
value
 
     (in thousands)  

December 31, 2012

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 38,422         922         —         $ 39,344   

Obligations of states and political subdivisions

     20,375         534         8         20,901   

Mortgage-backed securities:

           

Government issued or guaranteed

     3,163,210         208,060         229         3,371,041   

Privately issued residential

     1,133,639         4,894         125,647         1,012,886   

Privately issued commercial

     8,648         2,378         26         11,000   

Collateralized debt obligations

     43,228         19,663         1,022         61,869   

Other debt securities

     136,603         2,247         26,900         111,950   

Equity securities

     98,945         14,921         3,420         110,446   
  

 

 

    

 

 

    

 

 

    

 

 

 
     4,643,070         253,619         157,252         4,739,437   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

           

Obligations of states and political subdivisions

     182,103         7,647         27         189,723   

Mortgage-backed securities:

           

Government issued or guaranteed

     597,340         31,727         —           629,067   

Privately issued

     242,378         160         94,900         147,638   

Other debt securities

     10,455         —           —           10,455   
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,032,276         39,534         94,927         976,883   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other securities

     302,648         —           —           302,648   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,977,994         293,153         252,179       $ 6,018,968   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross realized gains and losses from sales of investment securities were not significant for the quarters ended March 31, 2013 and 2012. The Company recognized $10 million and $11 million of pre-tax other-than-temporary impairment (“OTTI”) losses during the quarters ended March 31, 2013 and 2012, respectively, related to privately issued mortgage-backed securities. The impairment charges were recognized in light of deterioration of real estate values and a rise in delinquencies and charge-offs of underlying mortgage loans collateralizing those securities. The OTTI losses represent management’s estimate of credit losses inherent in the debt securities considering projected cash flows using assumptions for delinquency rates, loss severities, and other estimates of future collateral performance.

Changes in credit losses associated with debt securities for which OTTI losses have been recognized in earnings for the three months ended March 31, 2013 and 2012 follows:

 

    

Three months ended

March 31

 
     2013     2012  
     (in thousands)  

Beginning balance

   $ 197,809        285,399   

Additions for credit losses not previously recognized

     9,800        11,486   

Reductions for realized losses

     (20,495     (29,412
  

 

 

   

 

 

 

Ending balance

   $ 187,114        267,473   
  

 

 

   

 

 

 

 

- 10 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

At March 31, 2013, the amortized cost and estimated fair value of debt securities by contractual maturity were as follows:

 

     Amortized
cost
     Estimated
fair value
 
     (in thousands)  

Debt securities available for sale:

     

Due in one year or less

   $ 24,442         24,602   

Due after one year through five years

     22,459         23,522   

Due after five years through ten years

     9,221         9,843   

Due after ten years

     181,932         181,003   
  

 

 

    

 

 

 
     238,054         238,970   

Mortgage-backed securities available for sale

     3,940,009         4,023,157   
  

 

 

    

 

 

 
   $ 4,178,063         4,262,127   
  

 

 

    

 

 

 

Debt securities held to maturity:

     

Due in one year or less

   $ 25,558         25,691   

Due after one year through five years

     55,547         57,974   

Due after five years through ten years

     99,177         103,589   

Due after ten years

     10,211         10,211   
  

 

 

    

 

 

 
     190,493         197,465   

Mortgage-backed securities held to maturity

     768,706         713,318   
  

 

 

    

 

 

 
   $ 959,199         910,783   
  

 

 

    

 

 

 

 

- 11 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

A summary of investment securities that as of March 31, 2013 and December 31, 2012 had been in a continuous unrealized loss position for less than twelve months and those that had been in a continuous unrealized loss position for twelve months or longer follows:

 

     Less than 12 months     12 months or more  
     Fair
value
     Unrealized
losses
    Fair
value
     Unrealized
losses
 
     (in thousands)  

March 31, 2013

          

Investment securities available for sale:

          

Obligations of states and political subdivisions

   $ 572         (3     680         (4

Mortgage-backed securities:

          

Government issued or guaranteed

     7,966         (41     7,450         (137

Privately issued

     89,046         (401     695,871         (97,588

Collateralized debt obligations

     —           —          6,039         (1,038

Other debt securities

     —           —          101,198         (21,505

Equity securities

     7         (7     —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 
     97,591         (452     811,238         (120,272
  

 

 

    

 

 

   

 

 

    

 

 

 

Investment securities held to maturity:

          

Obligations of states and political subdivisions

     1,065         (7     1,794         (24

Privately issued mortgage-backed securities

     —           —          155,050         (81,438
  

 

 

    

 

 

   

 

 

    

 

 

 
     1,065         (7     156,844         (81,462
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 98,656         (459     968,082         (201,734
  

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2012

          

Investment securities available for sale:

          

Obligations of states and political subdivisions

   $ 166         (1     683         (7

Mortgage-backed securities:

          

Government issued or guaranteed

     12,107         (65     8,804         (164

Privately issued residential

     121,487         (692     773,409         (124,955

Privately issued commercial

     —           —          919         (26

Collateralized debt obligations

     —           —          6,043         (1,022

Other debt securities

     —           —          95,685         (26,900

Equity securities

     5,535         (1,295     2,956         (2,125
  

 

 

    

 

 

   

 

 

    

 

 

 
     139,295         (2,053     888,499         (155,199
  

 

 

    

 

 

   

 

 

    

 

 

 

Investment securities held to maturity:

          

Obligations of states and political subdivisions

     1,026         (5     3,558         (22

Privately issued mortgage-backed securities

     —           —          147,273         (94,900
  

 

 

    

 

 

   

 

 

    

 

 

 
     1,026         (5     150,831         (94,922
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 140,321         (2,058     1,039,330         (250,121
  

 

 

    

 

 

   

 

 

    

 

 

 

 

- 12 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

The Company owned 241 individual investment securities with aggregate gross unrealized losses of $202 million at March 31, 2013. Approximately $179 million of the unrealized losses pertain to privately issued mortgage-backed securities with a cost basis of $1.1 billion. The Company also had $23 million of unrealized losses on trust preferred securities issued by financial institutions and securities backed by trust preferred securities having a cost basis of $130 million. Based on a review of each of the remaining securities in the investment securities portfolio at March 31, 2013, with the exception of the aforementioned securities for which OTTI losses were recognized, the Company concluded that it expected to recover the amortized cost basis of its investment. As of March 31, 2013, the Company does not intend to sell nor is it anticipated that it would be required to sell any of its impaired investment securities. At March 31, 2013, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the fair value of the $301 million of cost method investment securities.

4. Loans and leases and the allowance for credit losses

The outstanding principal balance and the carrying amount of acquired loans that were recorded at fair value at the acquisition date that is included in the consolidated balance sheet were as follows:

 

     March 31,
2013
     December 31,
2012
 
     (in thousands)  

Outstanding principal balance

   $ 6,148,875         6,705,120   

Carrying amount:

     

Commercial, financial, leasing, etc.

     754,913         928,107   

Commercial real estate

     2,322,317         2,567,050   

Residential real estate

     677,306         707,309   

Consumer

     1,560,598         1,637,887   
  

 

 

    

 

 

 
   $ 5,315,134         5,840,353   
  

 

 

    

 

 

 

Purchased impaired loans included in the table above totaled $425 million at March 31, 2013 and $447 million at December 31, 2012, representing less than 1% of the Company’s assets as of each date. A summary of changes in the accretable yield for acquired loans for the three months ended March 31, 2013 and 2012 follows:

 

     Three months ended March 31, 2013  
     Purchased
impaired
    Other
acquired
    Total  
     (in thousands)  

Balance at beginning of period

   $ 42,252        638,272        680,524   

Interest income

     (8,704     (61,747     (70,451

Reclassifications from (to) nonaccretable balance, net

     180        10,817        10,997   

Other (a)

     —          (9,733     (9,733
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 33,728        577,609        611,337   
  

 

 

   

 

 

   

 

 

 

 

- 13 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

4. Loans and leases and the allowance for credit losses, continued

 

     Three months ended March 31, 2012  
     Purchased
impaired
    Other
acquired
    Total  
     (in thousands)  

Balance at beginning of period

   $ 30,805        807,960        838,765   

Interest income

     (7,664     (73,723     (81,387

Reclassifications from (to) nonaccretable balance, net

     (576     1,000        424   

Other (a)

     —          12,229        12,229   
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 22,565        747,466        770,031   
  

 

 

   

 

 

   

 

 

 

 

(a) Other changes in expected cash flows including changes in interest rates and prepayment assumptions.

A summary of current, past due and nonaccrual loans as of March 31, 2013 and December 31, 2012 were as follows:

 

     Current      30-89
Days

past  due
     90 Days or
more past
due and accruing
     Purchased
impaired
(b)
     Nonaccrual      Total  
         Non-
acquired
     Acquired
(a)
          
                   (in thousands)                       

March 31, 2013

                    

Commercial, financial, leasing, etc.

   $ 17,144,615         90,708         3,669         9,206         16,741         204,199         17,469,138   

Real estate:

                    

Commercial

     21,513,598         185,101         11,444         41,268         121,090         186,239         22,058,740   

Residential builder and developer

     781,748         30,019         513         20,365         167,207         166,796         1,166,648   

Other commercial construction

     2,541,578         42,849         2,279         14,301         78,254         40,170         2,719,431   

Residential

     9,742,192         279,879         309,366         43,050         38,709         252,799         10,665,995   

Residential Alt-A

     315,500         24,779         —           —           —           88,303         428,582   

Consumer:

                    

Home equity lines and loans

     6,068,137         33,433         —           27,359         3,231         72,021         6,204,181   

Automobile

     2,466,577         30,363         —           158         —           20,095         2,517,193   

Other

     2,634,775         32,039         4,012         1,361         —           22,172         2,694,359   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 63,208,720         749,170         331,283         157,068         425,232         1,052,794         65,924,267   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

- 14 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

4. Loans and leases and the allowance for credit losses, continued

 

     Current      30-89
Days

past due
     90 Days or
more past
due and accruing
     Purchased
impaired

(b)
     Nonaccrual      Total  
         Non-
acquired
     Acquired
(a)
          
                   (in thousands)                       

December 31, 2012

                    

Commercial, financial, leasing, etc.

   $ 17,511,052         62,479         23,490         10,587         17,437         151,908         17,776,953   

Real estate:

                    

Commercial

     21,759,997         118,249         13,111         54,995         132,962         193,859         22,273,173   

Residential builder and developer

     757,311         35,419         3,258         23,909         187,764         181,865         1,189,526   

Other commercial construction

     2,379,953         35,274         509         9,572         68,971         36,812         2,531,091   

Residential

     9,811,956         337,969         313,184         45,124         36,769         249,314         10,794,316   

Residential Alt-A

     331,021         19,692         —           —           —           95,808         446,521   

Consumer:

                    

Home equity lines and loans

     6,199,591         40,759         —           20,318         3,211         58,071         6,321,950   

Automobile

     2,442,502         40,461         —           251         —           25,107         2,508,321   

Other

     2,661,432         40,599         4,845         1,798         —           20,432         2,729,106   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 63,854,815         730,901         358,397         166,554         447,114         1,013,176         66,570,957   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Acquired loans that were recorded at fair value at acquisition date. This category does not include purchased impaired loans that are presented separately.
(b) Accruing loans that were impaired at acquisition date and were recorded at fair value.

Changes in the allowance for credit losses for the three months ended March 31, 2013 and 2012 were as follows:

 

     Commercial,
Financial,

Leasing, etc.
    Real Estate                     
       Commercial     Residential     Consumer     Unallocated      Total  
     (in thousands)  

2013

             

Beginning balance

   $ 246,759        337,101        88,807        179,418        73,775         925,860   

Provision for credit losses

     17,880        (312     5,036        14,836        560         38,000   

Net charge-offs

             

Charge-offs

     (9,544     (9,588     (8,171     (21,645     —           (48,948

Recoveries

     2,756        815        4,450        4,184        —           12,205   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (6,788     (8,773     (3,721     (17,461     —           (36,743
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 257,851        328,016        90,122        176,793        74,335         927,117   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

2012

             

Beginning balance

   $ 234,022        367,637        91,915        143,121        71,595         908,290   

Provision for credit losses

     10,121        (2,260     16,230        23,538        1,371         49,000   

Net charge-offs

             

Charge-offs

     (8,037     (10,540     (12,718     (28,981     —           (60,276

Recoveries

     3,167        1,717        1,874        5,234        —           11,992   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (4,870     (8,823     (10,844     (23,747     —           (48,284
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 239,273        356,554        97,301        142,912        72,966         909,006   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Despite the above allocation, the allowance for credit losses is general in nature and is available to absorb losses from any loan or lease type.

 

- 15 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

4. Loans and leases and the allowance for credit losses, continued

 

In establishing the allowance for credit losses, the Company estimates losses attributable to specific troubled credits identified through both normal and detailed or intensified credit review processes and also estimates losses inherent in other loans and leases on a collective basis. For purposes of determining the level of the allowance for credit losses, the Company evaluates its loan and lease portfolio by loan type. The amounts of loss components in the Company’s loan and lease portfolios are determined through a loan by loan analysis of larger balance commercial and commercial real estate loans that are in nonaccrual status and by applying loss factors to groups of loan balances based on loan type and management’s classification of such loans under the Company’s loan grading system. Measurement of the specific loss components is typically based on expected future cash flows, collateral values and other factors that may impact the borrower’s ability to pay. In determining the allowance for credit losses, the Company utilizes a loan grading system which is applied to commercial and commercial real estate credits on an individual loan basis. Loan officers are responsible for continually assigning grades to these loans based on standards outlined in the Company’s Credit Policy. Internal loan grades are also monitored by the Company’s loan review department to ensure consistency and strict adherence to the prescribed standards. Loan grades are assigned loss component factors that reflect the Company’s loss estimate for each group of loans and leases. Factors considered in assigning loan grades and loss component factors include borrower-specific information related to expected future cash flows and operating results, collateral values, geographic location, financial condition and performance, payment status, and other information; levels of and trends in portfolio charge-offs and recoveries; levels of and trends in portfolio delinquencies and impaired loans; changes in the risk profile of specific portfolios; trends in volume and terms of loans; effects of changes in credit concentrations; and observed trends and practices in the banking industry. As updated appraisals are obtained on individual loans or other events in the market place indicate that collateral values have significantly changed, individual loan grades are adjusted as appropriate. Changes in other factors cited may also lead to loan grade changes at any time. Except for consumer and residential mortgage loans that are considered smaller balance homogenous loans and acquired loans that are evaluated on an aggregated basis, the Company considers a loan to be impaired for purposes of applying GAAP when, based on current information and events, it is probable that the Company will be unable to collect all amounts according to the contractual terms of the loan agreement or the loan is delinquent 90 days. Regardless of loan type, the Company considers a loan to be impaired if it qualifies as a troubled debt restructuring. Modified loans, including smaller balance homogenous loans, that are considered to be troubled debt restructurings are evaluated for impairment giving consideration to the impact of the modified loan terms on the present value of the loan’s expected cash flows.

 

- 16 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

4. Loans and leases and the allowance for credit losses, continued

 

The following tables provide information with respect to loans and leases that were considered impaired as of March 31, 2013 and December 31, 2012 and for the three month periods ended March 31, 2013 and 2012.

 

     March 31, 2013      December 31, 2012  
     Recorded
investment
     Unpaid
principal

balance
     Related
allowance
     Recorded
investment
     Unpaid
principal
balance
     Related
allowance
 
     (in thousands)  

With an allowance recorded:

                 

Commercial, financial, leasing, etc.

   $ 165,867         186,405         45,277         127,282         149,534         33,829   

Real estate:

                 

Commercial

     116,111         142,349         19,859         121,542         143,846         23,641   

Residential builder and developer

     106,510         202,139         19,956         115,306         216,218         25,661   

Other commercial construction

     73,622         77,164         6,533         73,544         76,869         6,836   

Residential

     104,096         123,244         5,464         103,451         121,819         3,521   

Residential Alt-A

     125,781         139,779         17,000         128,891         141,940         17,000   

Consumer:

                 

Home equity lines and loans

     12,457         13,805         2,315         12,360         13,567         2,254   

Automobile

     45,876         45,876         12,916         49,210         49,210         14,273   

Other

     15,280         15,280         5,519         14,408         14,408         5,667   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     765,600         946,041         134,839         745,994         927,411         132,682   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With no related allowance recorded:

                 

Commercial, financial, leasing, etc.

     46,187         58,422         —           32,631         42,199         —     

Real estate:

                 

Commercial

     76,396         98,494         —           78,380         100,337         —     

Residential builder and developer

     67,685         93,936         —           74,307         105,438         —     

Other commercial construction

     26,298         27,170         —           23,018         23,532         —     

Residential

     86,240         96,741         —           86,342         96,448         —     

Residential Alt-A

     28,083         53,057         —           31,354         58,768         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     330,889         427,820         —           326,032         426,722         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

                 

Commercial, financial, leasing, etc.

     212,054         244,827         45,277         159,913         191,733         33,829   

Real estate:

                 

Commercial

     192,507         240,843         19,859         199,922         244,183         23,641   

Residential builder and developer

     174,195         296,075         19,956         189,613         321,656         25,661   

Other commercial construction

     99,920         104,334         6,533         96,562         100,401         6,836   

Residential

     190,336         219,985         5,464         189,793         218,267         3,521   

Residential Alt-A

     153,864         192,836         17,000         160,245         200,708         17,000   

Consumer:

                 

Home equity lines and loans

     12,457         13,805         2,315         12,360         13,567         2,254   

Automobile

     45,876         45,876         12,916         49,210         49,210         14,273   

Other

     15,280         15,280         5,519         14,408         14,408         5,667   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,096,489         1,373,861         134,839         1,072,026         1,354,133         132,682   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

4. Loans and leases and the allowance for credit losses, continued

 

     Three months ended
March 31, 2013
     Three months ended
March 31, 2012
 
            Interest income
recognized
            Interest income
recognized
 
     Average
recorded
investment
     Total      Cash
basis
     Average
recorded
investment
     Total      Cash
basis
 
     (in thousands)  

Commercial, financial, leasing, etc.

   $ 167,793         2,434         2,434         167,724         409         409   

Real estate:

                 

Commercial

     194,446         303         303         178,315         318         318   

Residential builder and developer

     183,853         140         65         282,495         341         179   

Other commercial construction

     98,318         635         635         104,105         170         170   

Residential

     188,075         1,470         922         126,376         1,342         878   

Residential Alt-A

     156,971         1,740         591         181,018         1,843         546   

Consumer:

                 

Home equity lines and loans

     12,454         167         39         9,998         166         42   

Automobile

     47,606         776         146         53,289         898         178   

Other

     14,930         151         54         8,302         93         39   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,064,446         7,816         5,189         1,111,622         5,580         2,759   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In accordance with the previously described policies, the Company utilizes a loan grading system that is applied to all commercial loans and commercial real estate loans. Loan grades are utilized to differentiate risk within the portfolio and consider the expectations of default for each loan. Commercial loans and commercial real estate loans with a lower expectation of default are assigned one of ten possible “pass” loan grades and are generally ascribed lower loss factors when determining the allowance for credit losses. Loans with an elevated level of credit risk are classified as “criticized” and are ascribed a higher loss factor when determining the allowance for credit losses. Criticized loans may be classified as “nonaccrual” if the Company no longer expects to collect all amounts according to the contractual terms of the loan agreement or the loan is delinquent 90 days or more. All larger balance criticized commercial and commercial real estate loans are individually reviewed by centralized loan review personnel each quarter to determine the appropriateness of the assigned loan grade, including whether the loan should be reported as accruing or nonaccruing. Smaller balance criticized loans are analyzed by business line risk management areas to ensure proper loan grade classification. Furthermore, criticized nonaccrual commercial loans and commercial real estate loans are considered impaired and, as a result, specific loss allowances on such loans are established within the allowance for credit losses to the extent appropriate in each individual instance. The following table summarizes the loan grades applied to the various classes of the Company’s commercial and commercial real estate loans.

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

4. Loans and leases and the allowance for credit losses, continued

 

     Commercial,
Financial,
Leasing, etc.
     Real Estate  
        Commercial      Residential
Builder and
Developer
     Other
Commercial
Construction
 
     (in thousands)  

March 31, 2013

           

Pass

   $ 16,590,137         21,086,718         929,857         2,533,617   

Criticized accrual

     674,802         785,783         69,995         145,644   

Criticized nonaccrual

     204,199         186,239         166,796         40,170   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,469,138         22,058,740         1,166,648         2,719,431   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

           

Pass

   $ 16,889,753         21,275,182         922,141         2,307,436   

Criticized accrual

     735,292         804,132         85,520         186,843   

Criticized nonaccrual

     151,908         193,859         181,865         36,812   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,776,953         22,273,173         1,189,526         2,531,091   
  

 

 

    

 

 

    

 

 

    

 

 

 

In determining the allowance for credit losses, residential real estate loans and consumer loans are generally evaluated collectively after considering such factors as payment performance and recent loss experience and trends, which are mainly driven by current collateral values in the market place as well as the amount of loan defaults. Loss rates on such loans are determined by reference to recent charge-off history and are evaluated (and adjusted if deemed appropriate) through consideration of other factors including near-term forecasted loss estimates developed by the Company’s Credit Department. In arriving at such forecasts, the Company considers the current estimated fair value of its collateral based on geographical adjustments for home price depreciation/appreciation and overall borrower repayment performance. With regard to collateral values, the realizability of such values by the Company contemplates repayment of the original balance of any first lien position prior to recovering amounts on a second lien position. However, residential real estate loans and outstanding balances of home equity loans and lines of credit that are more than 150 days past due are generally evaluated for collectibility on a loan-by-loan basis giving consideration to estimated collateral values.

The Company also measures additional losses for purchased impaired loans when it is probable that the Company will be unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimates after acquisition. The determination of the allocated portion of the allowance for credit losses is very subjective. Given that inherent subjectivity and potential imprecision involved in determining the allocated portion of the allowance for credit losses, the Company also provides an inherent unallocated portion of the allowance. The unallocated portion of the allowance is intended to recognize probable losses that are not otherwise identifiable and includes management’s subjective determination of amounts necessary to provide for the possible use of imprecise estimates in determining the allocated portion of the allowance. Therefore, the level of the unallocated portion of the allowance is primarily reflective of the inherent imprecision in the various calculations used in determining the allocated portion of the allowance for credit losses. Other factors that could also lead to changes in the unallocated portion include the effects of expansion into new markets for which the Company does not have the same degree of familiarity and experience regarding portfolio performance in changing market conditions, the introduction of new loan and lease product types, and other risks associated with the Company’s loan portfolio that may not be specifically identifiable.

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

4. Loans and leases and the allowance for credit losses, continued

 

The allocation of the allowance for credit losses summarized on the basis of the Company’s impairment methodology was as follows:

 

     Commercial,
Financial,
Leasing, etc.
     Real Estate                
        Commercial      Residential      Consumer      Total  
     (in thousands)  

March 31, 2013

              

Individually evaluated for impairment

   $ 45,277         45,503         22,444         20,750       $ 133,974   

Collectively evaluated for impairment

     212,574         281,492         66,145         155,480         715,691   

Purchased impaired

     —           1,021         1,533         563         3,117   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allocated

   $ 257,851         328,016         90,122         176,793         852,782   
  

 

 

    

 

 

    

 

 

    

 

 

    

Unallocated

                 74,335   
              

 

 

 

Total

               $ 927,117   
              

 

 

 

December 31, 2012

              

Individually evaluated for impairment

   $ 33,669         55,291         20,502         22,194       $ 131,656   

Collectively evaluated for impairment

     212,930         280,789         66,684         156,661         717,064   

Purchased impaired

     160         1,021         1,621         563         3,365   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allocated

   $ 246,759         337,101         88,807         179,418         852,085   
  

 

 

    

 

 

    

 

 

    

 

 

    

Unallocated

                 73,775   
              

 

 

 

Total

               $ 925,860   
              

 

 

 

The recorded investment in loans and leases summarized on the basis of the Company’s impairment methodology was as follows:

 

     Commercial,
Financial,
Leasing, etc.
     Real Estate                
        Commercial      Residential      Consumer      Total  
     (in thousands)  

March 31, 2013

              

Individually evaluated for impairment

   $ 212,054         461,084         343,642         73,611       $ 1,090,391   

Collectively evaluated for impairment

     17,240,343         25,117,184         10,712,226         11,338,891         64,408,644   

Purchased impaired

     16,741         366,551         38,709         3,231         425,232   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,469,138         25,944,819         11,094,577         11,415,733       $ 65,924,267   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

              

Individually evaluated for impairment

   $ 159,761         480,335         349,477         75,978       $ 1,065,551   

Collectively evaluated for impairment

     17,599,755         25,123,758         10,854,591         11,480,188         65,058,292   

Purchased impaired

     17,437         389,697         36,769         3,211         447,114   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,776,953         25,993,790         11,240,837         11,559,377       $ 66,570,957   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

During the normal course of business, the Company modifies loans to maximize recovery efforts. If the borrower is experiencing financial difficulty and a concession is granted, the Company considers such modifications as troubled debt restructurings and classifies those loans as either nonaccrual loans or renegotiated

 

- 20 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

4. Loans and leases and the allowance for credit losses, continued

 

loans. The types of concessions that the Company grants typically include principal deferrals and interest rate concessions, but may also include other types of concessions.

The table below summarizes the Company’s loan modification activities that were considered troubled debt restructurings for the three months ended March 31, 2013:

 

            Recorded investment      Financial effects of
modification
 
     Number      Pre-
modification
     Post-
modification
     Recorded
investment
(a)
    Interest
(b)
 
     (dollars in thousands)  

Commercial, financial, leasing, etc.

             

Principal deferral

     24       $ 2,006       $ 1,982       $ (24   $ —     

Other

     1         47,200         47,200         —          —     

Combination of concession types

     1         342         342         —          —     

Real estate:

             

Commercial

             

Principal deferral

     8         18,478         18,363         (115     —     

Combination of concession types

     2         582         581         (1     (56

Residential builder and developer

             

Principal deferral

     8         1,357         1,340         (17     —     

Combination of concession types

     1         1,701         1,691         (10     —     

Residential

             

Principal deferral

     7         566         607         41        —     

Other

     1         195         195         —          —     

Combination of concession types

     20         2,449         2,536         87        (371

Residential Alt-A

             

Combination of concession types

     5         907         925         18        (110

Consumer:

             

Home equity lines and loans

             

Principal deferral

     2         79         79         —          —     

Combination of concession types

     2         211         211         —          (33

Automobile

             

Principal deferral

     121         1,586         1,586         —          —     

Interest rate reduction

     2         36         36         —          (5

Other

     17         159         159         —          —     

Combination of concession types

     61         553         553         —          (42

Other

             

Principal deferral

     6         45         45         —          —     

Other

     1         12         12         —          —     

Combination of concession types

     42         1,217         1,217         —          (267
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     332       $ 79,681       $ 79,660       $ (21   $ (884
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(a) Financial effects impacting the recorded investment included principal payments or advances, charge-offs and capitalized escrow arrearages.
(b) Represents the present value of interest rate concessions discounted at the effective rate of the original loan.

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

4. Loans and leases and the allowance for credit losses, continued

 

The table below summarizes the Company’s loan modification activities that were considered troubled debt restructurings for the three months ended March 31, 2012:

 

            Recorded investment      Financial effects of
modification
 
     Number      Pre-
modification
     Post-
modification
     Recorded
investment
(a)
    Interest
(b)
 
     (dollars in thousands)  

Commercial, financial, leasing, etc.

             

Principal deferral

     9       $ 2,812       $ 2,954       $ 142      $ —     

Other

     1         972         1,098         126        —     

Combination of concession types

     1         45         44         (1     (33

Real estate:

             

Commercial

             

Principal deferral

     2         2,425         2,405         (20     —     

Residential builder and developer

             

Principal deferral

     5         6,822         6,034         (788     —     

Combination of concession types

     2         2,350         2,726         376        —     

Residential

             

Principal deferral

     15         1,505         1,588         83        —     

Combination of concession types

     18         2,936         3,007         71        (200

Residential Alt-A

             

Principal deferral

     3         397         407         10        —     

Combination of concession types

     8         1,360         1,394         34        (5

Consumer:

             

Home equity lines and loans

             

Principal deferral

     1         117         117         —          —     

Interest rate reduction

     1         144         144         —          (6

Combination of concession types

     2         235         235         —          (24

Automobile

             

Principal deferral

     153         1,885         1,885         —          —     

Interest rate reduction

     4         57         57         —          (4

Other

     10         19         19         —          —     

Combination of concession types

     112         1,609         1,609         —          (172

Other

             

Principal deferral

     52         647         647         —          —     

Interest rate reduction

     3         23         23         —          (3

Other

     9         49         49         —          —     

Combination of concession types

     34         219         219         —          (36
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     445       $ 26,628       $ 26,661       $ 33      $ (483
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(a) Financial effects impacting the recorded investment included principal payments or advances, charge-offs and capitalized escrow arrearages.
(b) Represents the present value of interest rate concessions discounted at the effective rate of the original loan.

Troubled debt restructurings are considered to be impaired loans and for purposes of establishing the allowance for credit losses are evaluated for impairment giving consideration to the impact of the modified loan terms on the present value of the loan’s expected cash flows. Impairment of troubled debt restructurings that have subsequently defaulted may also be measured based on the loan’s observable market price or the fair value of collateral if the loan is collateral-dependent. Charge-offs may also be recognized on troubled debt restructurings that have subsequently defaulted. Loans that were modified as troubled debt restructurings during the twelve months ended March 31, 2013 and 2012 and for which there was a subsequent payment default during the three-month periods ended March 31, 2013 and 2012, respectively, were not material.

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

5. Borrowings

M&T had $1.2 billion of fixed and floating rate junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) outstanding at March 31, 2013 that are held by various trusts and were issued in connection with the issuance by those trusts of preferred capital securities (“Capital Securities”) and common securities (“Common Securities”). The proceeds from the issuances of the Capital Securities and the Common Securities were used by the trusts to purchase the Junior Subordinated Debentures. The Common Securities of each of those trusts are wholly owned by M&T and are the only class of each trust’s securities possessing general voting powers. The Capital Securities represent preferred undivided interests in the assets of the corresponding trust.

Under the Federal Reserve Board’s current risk-based capital guidelines, the Capital Securities are includable in M&T’s Tier 1 capital. However, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that was signed into law on July 21, 2010 provides for a three-year phase-in related to the exclusion of trust preferred capital securities from Tier 1 capital for large financial institutions, including M&T. That phase-in period began on January 1, 2013. However, specific rules related to that phase-in period have not yet been finalized.

Holders of the Capital Securities receive preferential cumulative cash distributions unless M&T exercises its right to extend the payment of interest on the Junior Subordinated Debentures as allowed by the terms of each such debenture, in which case payment of distributions on the respective Capital Securities will be deferred for comparable periods. During an extended interest period, M&T may not pay dividends or distributions on, or repurchase, redeem or acquire any shares of its capital stock. In the event of an extended interest period exceeding twenty quarterly periods for $350 million of Junior Subordinated Debentures due January 31, 2068, M&T must fund the payment of accrued and unpaid interest through an alternative payment mechanism, which requires M&T to issue common stock, non-cumulative perpetual preferred stock or warrants to purchase common stock until M&T has raised an amount of eligible proceeds at least equal to the aggregate amount of accrued and unpaid deferred interest on the Junior Subordinated Debentures due January 31, 2068. In general, the agreements governing the Capital Securities, in the aggregate, provide a full, irrevocable and unconditional guarantee by M&T of the payment of distributions on, the redemption of, and any liquidation distribution with respect to the Capital Securities. The obligations under such guarantee and the Capital Securities are subordinate and junior in right of payment to all senior indebtedness of M&T.

The Capital Securities will remain outstanding until the Junior Subordinated Debentures are repaid at maturity, are redeemed prior to maturity or are distributed in liquidation to the Trusts. The Capital Securities are mandatorily redeemable in whole, but not in part, upon repayment at the stated maturity dates (ranging from 2027 to 2068) of the Junior Subordinated Debentures or the earlier redemption of the Junior Subordinated Debentures in whole upon the occurrence of one or more events set forth in the indentures relating to the Capital Securities, and in whole or in part at any time after an optional redemption prior to contractual maturity contemporaneously with the optional redemption of the related Junior Subordinated Debentures in whole or in part, subject to possible regulatory approval.

During the first quarter of 2013, M&T Bank, the principal bank subsidiary of M&T, finalized a Bank Note Program whereby M&T Bank may offer up to $5 billion of unsecured senior and subordinated notes, which will mature 270 days or more from their date of issue. During March 2013, three-year floating rate senior notes due March 2016 were issued for $300 million and five-year 1.45% fixed rate senior notes due March 2018 were issued for $500 million.

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

5. Borrowings, continued

 

Also included in long-term borrowings are agreements to repurchase securities of $1.4 billion at each of March 31, 2013 and December 31, 2012. The agreements are subject to master netting arrangements and are fully collateralized.

6. Shareholders’ equity

M&T is authorized to issue 1,000,000 shares of preferred stock with a $1.00 par value per share. Preferred shares outstanding rank senior to common shares both as to dividends and liquidation preference, but have no general voting rights.

Issued and outstanding preferred stock of M&T is presented below:

 

     Shares
issued and
outstanding
     Carrying
value
March 31,  2013
     Carrying
value
December 31, 2012
 
            (dollars in thousands)  

Series A (a)

        

Fixed Rate Cumulative Perpetual Preferred Stock, Series A, $1,000 liquidation preference per share

     230,000       $ 227,711       $ 226,965   

Series C (a)(b)

        

Fixed Rate Cumulative Perpetual Preferred Stock, Series C, $1,000 liquidation preference per share

     151,500         146,916         145,535   

Series D (c)

        

Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series D, $10,000 liquidation preference per share

     50,000         500,000         500,000   

 

(a) Shares were originally issued as part of the Troubled Asset Relief Program – Capital Purchase Program (“TARP”) of the U.S. Department of Treasury (“U.S. Treasury”). Cash proceeds were allocated between the preferred stock and a ten-year warrant to purchase M&T common stock (Series A – 1,218,522 common shares at $73.86 per share, Series C – 407,542 common shares at $55.76 per share). The U.S. Treasury sold all of the shares of M&T preferred stock that it held in August 2012. In connection with that sale, the terms of the preferred stock were modified such that dividends, if declared, will accrue and be paid quarterly at a rate of 5% per year through November 14, 2013 and at 6.375% thereafter, and that M&T will not redeem the preferred shares until on or after November 15, 2018. In December 2012, the U.S. Treasury sold to other investors the Series A warrants for $26.50 per warrant. In March 2013, the U.S. Treasury exercised the Series C warrants in a “cashless” exercise, resulting in the issuance of 186,589 common shares.
(b) Shares were assumed in an acquisition and a new Series C Preferred Stock was designated.
(c) Shares were issued on May 31, 2011. Dividends, if declared, will be paid semi-annually at a rate of 6.875% per year. The shares are redeemable in whole or in part on or after June 15, 2016. Notwithstanding M&T’s option to redeem the shares, if an event occurs such that the shares no longer qualify as Tier 1 Capital, M&T may redeem all of the shares within 90 days following that occurrence.

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

6. Shareholders’ equity, continued

 

In addition to the Series A and Series C warrants mentioned in (a) above, a ten-year warrant to purchase 95,383 shares of M&T common stock at $518.96 per share was outstanding at March 31, 2013 and December 31, 2012.

7. Pension plans and other postretirement benefits

The Company provides defined benefit pension and other postretirement benefits (including health care and life insurance benefits) to qualified retired employees. Net periodic benefit cost for defined benefit plans consisted of the following:

 

     Pension
benefits
    Other
postretirement
benefits
 
     Three months ended March 31  
     2013     2012     2013     2012  
     (in thousands)  

Service cost

   $ 6,050        7,900        200        175   

Interest cost on projected benefit obligation

     15,126        15,600        675        950   

Expected return on plan assets

     (21,875     (17,675     —          —     

Amortization of prior service credit

     (1,650     (1,650     (350     —     

Amortization of net actuarial loss

     10,400        9,400        100        100   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 8,051        13,575        625        1,225   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expense incurred in connection with the Company’s defined contribution pension and retirement savings plans totaled $15,755,000 and $14,625,000 for the three months ended March 31, 2013 and 2012, respectively.

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

8. Earnings per common share

The computations of basic earnings per common share follow:

 

    

Three months ended

March 31

 
     2013     2012  
     (in thousands, except per share)  

Income available to common shareholders:

    

Net income

   $ 274,113        206,463   

Less: Preferred stock dividends (a)

     (13,363     (13,363

Amortization of preferred stock discount (a)

     (2,147     (1,924
  

 

 

   

 

 

 

Net income available to common equity

     258,603        191,176   

Less: Income attributable to unvested stock-based compensation awards

     (3,524     (2,940
  

 

 

   

 

 

 

Net income available to common shareholders

   $ 255,079        188,236   

Weighted-average shares outstanding:

    

Common shares outstanding (including common stock issuable) and unvested stock-based compensation awards

     129,449        127,157   

Less: Unvested stock-based compensation awards

     (1,780     (1,937
  

 

 

   

 

 

 

Weighted-average shares outstanding

     127,669        125,220   

Basic earnings per common share

   $ 2.00        1.50   

 

(a) Including impact of not as yet declared cumulative dividends.

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

8. Earnings per common share, continued

 

The computations of diluted earnings per common share follow:

 

     Three months ended
March 31
 
     2013     2012  
     (in thousands, except per share)  

Net income available to common equity

   $ 258,603        191,176   

Less: Income attributable to unvested stock-based compensation awards

     (3,507     (2,935
  

 

 

   

 

 

 

Net income available to common shareholders

   $ 255,096        188,241   

Adjusted weighted-average shares outstanding:

    

Common shares outstanding (including common stock issuable) and unvested stock-based compensation awards

     129,449        127,157   

Less: Unvested stock-based compensation awards

     (1,780     (1,937

Plus: Incremental shares from assumed conversion of stock-based compensation awards and convertible preferred stock

     967        396   
  

 

 

   

 

 

 

Adjusted weighted-average shares outstanding

     128,636        125,616   

Diluted earnings per common share

   $ 1.98        1.50   

GAAP defines unvested share-based awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) as participating securities that shall be included in the computation of earnings per common share pursuant to the two-class method. The Company has issued stock-based compensation awards in the form of restricted stock and restricted stock units, which, in accordance with GAAP, are considered participating securities.

Stock-based compensation awards and warrants to purchase common stock of M&T representing approximately 4.7 million and 10.0 million common shares during the three-month periods ended March 31, 2013 and 2012, respectively, were not included in the computations of diluted earnings per common share because the effect on those periods would have been antidilutive.

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

9. Comprehensive income

The following tables display the components of other comprehensive income (loss) and amounts reclassified from accumulated other comprehensive income (loss) to net income:

 

     Investment Securities                                
     With
OTTI
    All other     Defined
benefit

plans
    Other     Total
amount
before tax
    Income
tax
    Net  
     (in thousands)  

Balance – January 1, 2013

   $ (91,835     152,199        (455,590     (431   $ (395,657     155,393      $ (240,264

Other comprehensive income before reclassifications:

              

Unrealized holding gains (losses), net

     24,540        (18,959     —          —          5,581        (2,181     3,400   

Foreign currency translation adjustment

     —          —          —          (1,452     (1,452     520        (932
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income before reclassifications

     24,540        (18,959     —          (1,452     4,129        (1,661     2,468   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts reclassified from accumulated other comprehensive income that (increase) decrease net income:

              

Accretion of unrealized holding losses on held-to-maturity (“HTM”) securities

     49        1,146        —          —          1,195 (a)      (469     726   

OTTI charges recognized in net income

     9,800        —          —          —          9,800 (b)      (3,847     5,953   

Amortization of prior service credit

     —          —          (2,000     —          (2,000 )(e)      785        (1,215

Amortization of actuarial losses

     —          —          10,500        —          10,500 (e)      (4,121     6,379   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassifications

     9,849        1,146        8,500        —          19,495        (7,652     11,843   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gain (loss) during the period

     34,389        (17,813     8,500        (1,452     23,624        (9,313     14,311   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – March 31, 2013

   $ (57,446     134,386